US stocks fall despite investors’ bet on a slower Fed rate hike

US stocks fell and Treasuries sold off on Friday after a mixed run of bank earnings overshadowed further inflation easing in December, rekindling fears of a recession later this year.

Wall Street’s blue-chip S&P 500 and the tech-heavy Nasdaq Composite both fell 0.4% in morning trade in New York. Auto stocks led the decline, with Ford down 6% and General Motors down 4.6% after Tesla said it would cut its prices by a fifth in the US and Europe. Tesla fell 3.2%.

Line chart of the electric car maker's stock is down 25% in the past month alone, showing Tesla's shares continue to decline

The moves came after stock markets rallied Thursday on the back of data showing US annual inflation fell for the sixth consecutive month to 6.5%, the consumer price index reading sharpest low in one year. Rate markets immediately priced in a higher likelihood that the Fed will ease the pace of its monetary tightening at its next meeting in three weeks time, with a 0.25 percentage point increase now expected to follow a half percentage point increase in December.

“The Fed is nearing the end of its rate-hiking cycle, which we believe is likely by the end of the first quarter,” analysts at UBS Global Wealth Management said. Even so, “tight labor markets” mean rates are unlikely to fall any time soon, with the US unemployment rate at a 50-year low, job vacancy rates high and the firing rate —” correlates with wage growth” – too high to warrant a so-called Fed pivot any time soon.

However, data from the Bureau of Labor Statistics shows that average hourly earnings rose less than expected in December as companies like Amazon, Meta, Twitter and Goldman Sachs began cutting jobs.

US government bonds sold off on Friday, with the yield on the two-year Treasury bill, particularly sensitive to interest rate expectations, climbing 0.05 percentage point to 4.19%, after peaking by 4.7% in November.

“Treasury yields tend to decline from 50 to 60 [basis points] on average, once the Fed goes on hold, and with our last rate hike expected still more than two months away, this rally looks somewhat premature,” JPMorgan analysts said.

Investor attention will now turn to the fourth-quarter earnings season, which kicked off on Friday with a mixed run of results for some of America’s largest financial groups. Year-over-year net income increased slightly for Bank of America and JPMorgan, while Wells Fargo’s quarterly profit halved compared to the same period in 2021, and BlackRock reported a 15% drop in revenue.

FactSet analysts noted that market concerns about a looming recession meant analysts last year lowered earnings-per-share estimates for S&P 500 companies by 6.5% for the fourth quarter, a larger margin. of the average.

Seema Shah, chief global strategist at Principal Asset Management, said that even if inflation falls beyond 4% at the end of this year, allowing for looser monetary policy, “markets will still be challenged by earnings concerns.” “.

“If inflation stabilizes there, then the Fed will have very little room to cut rates this year,” Shah added. “Not a great result, in any case.”

A measure of the dollar’s strength against a basket of six other currencies, it gained 0.2% on Friday, after falling 0.9% in the previous session. The world’s de facto reserve currency has lost nearly 10% in the past three months.

Elsewhere in stock markets, Europe’s Stoxx 600 gained 0.5%, London’s FTSE 100 gained 0.6% as it neared an all-time high and Germany’s Dax gained 0.2%.

Hong Kong’s Hang Seng index gained 1%, and China’s CSI 300 index of listed shares in Shanghai and Shenzhen gained 1.4%. Data released on Friday showed that Chinese exports suffered their sharpest decline in nearly three years in December, down 9.9% year-on-year in dollar terms.

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